Friday, October 20, 2006

Economics, Finance and Accounting

To my mind, the name of Finance minister is a misnomer. His key result areas are the growth of the GDP, tax environment, domestics savings, defining his role in economic affairs, rate of inflation, rate of interest, etc. And all these areas pertain to Macro Economics.

I don't know why our FM isn't called our EM: Economics Minister. More than getting into an unnecessary debate, I'll try to understand the linkages between Economics, Finance and Accounting. Because till now the three of them blurred into one for me, I must admit.

Prof. Prasanna Chandra in his book on Financial Management writes: "There are two important linkages between economics and finance. The macro-economic environment ( tax, monetory and fiscal policies, etc ) defines the setting within which the firms operate. The micro-economic environment(eg. cost analysis, marginal analysis, etc) provides the conceptual underpinning for the tools of financial decision making.

So we must attempt to understand the basic concepts of macro and micro economics to understand and take financial decisions.

Accounting was Finance for me. Moreover most Financial Managers are given responsibility for both accounts and finance. But it is important to understand that while Accounting is a kind of score keeping, Finance aims at value maximisation. Accounting help us to record all transactions while Finance help us in charting a future course of action.
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